LIVE MARKETS-Bund milestone weighs on European income stocks

Reuters Staff

8 Min Read

* European shares dip after flat start
* Heavy earnings week begins
* AMS soars after raising outlook, doubling revenue
* Sanofi buys Ablynx for 3.9 bln euros, Ablynx +20%
Jan 29 (Reuters) - Welcome to the home for real time coverage of European equity markets
brought to you by Reuters stocks reporters and anchored today by Helen Reid. Reach her on
Messenger to share your thoughts on market moves: helen.reid.thomsonreuters.com@reuters.net
BUND MILESTONE WEIGHS ON INCOME STOCKS (1200 GMT)
The benchmark German five-year bond yield just turned positive for the first time since 2015
and the 10-year U.S. treasury yield is at its highest since early 2014. The equity
market seems to be following the usual pattern of selling solid dividend payers -- consumer
staples, utilities, telecoms -- when fixed-income yields start looking more attractive.
All those categories have helped propel the STOXX 600 lower in late morning
trading, while banks whose business benefits from higher rates are up.
However, JPMorgan sees a sustained pick-up in bond yields as very important for the Euro
zone's performance: "A sustained pickup in yields is required for Eurozone equities to perform
better again ... If bond yields keep moving higher, as we expect, value should work and thus
help the performance of the European market."
(Tom Pfeiffer)
*****
STRONG EARNINGS NEEDED TO BUOY STOXX 600 ABOVE 400 (1119 GMT)
What could push the STOXX 600 sustainably above the 400-point level? It's flirted with it
previously but never held out at those altitudes for long.
Earnings are the key, JP Morgan analysts say. "Poor profitability was a major drag on Euro
zone performance in the current upcycle," they note. European earnings per share haven't yet
reached their pre-crisis 2008 levels while MSCI World earnings surpassed those highs long ago
(see chart).
But earnings beat expectations last year and should do so again in 2018, JPM says. Euro zone
earnings are highly geared to GDP, which the bank's economists see growing 2.9 percent this
year.
On top of that valuations aren't demanding, relatively speaking. Both the STOXX
price-to-earnings and price-to-book multiples relative to MSCI World are lower than at each of
the past three market peaks, JPM notes.
JPM has a year-end target of 430 for the STOXX 600, betting on the 'sustained breakout'
above 400 which has for so long eluded the index. Their one note of caution? "FX is a wild
card..."
(Helen Reid)
*****
IT'S NOT GOING TO BE A HAPPY VALENTINE'S FOR EUROPEAN FIRMS (1101 GMT)
Sometimes you've got to break up to make up, at least with your shareholders - BAML's credit
strategists are expecting to see an increase in Europe's big conglomerates slimming down this
year.
"We believe that the corporate "break up" theme is likely to grow in prominence this year as
activist investors continue to warm to Europe, and rising equity markets expose the
inefficiencies of big conglomerate companies," write BAML's credit strategists.
BAML cites recent examples of Continental and Thyssenkrupp, pointing to
Germany, France and the Netherlands as having the greatest share of conglomerates - thus the
most likely areas to watch for corporate divorces.
(Kit Rees)
*****
CHIPMAKER SHARES PARE GAINS AFTER NIKKEI IPHONE REPORT (1045 GMT)
The euphoria among European chip stocks after the blow-out guidance from AMS just
faded a little after Nikkei Asian Review said Apple had told suppliers it will halve
its Q1 production target for the flagship iPhone X to 20 million units from 40 million envisaged
in November. Nikkei did not disclose the source for its report. Link: s.nikkei.com/2njmW
Dialog Semiconductor, STMicroelectronics, Infineon and IQE
have given up a chunk of their earlier gains.
AMS is still up 18 percent, with analysts speculating that the Austrian company's upgraded
guidance is driven partly by prospects for new business with smartphone makers beside Apple.
(Tom Pfeiffer)
****
AMS SEEN FROM THE STREET (1015 GMT)
A 25 percent surge in ams has made the chipmaker the main focus in Europe's share
trading this morning. The outstanding move comes after a surprisingly solid update that could
help ease worries over the sustainability of a rally in richly valued tech stocks in a week
where results from Facebook, Amazon and Apple will put the sector back
at the fore of investors minds. We'll tell you more about tech but meanwhile here's a quick
recap of sell-side vies on ams' results.
Baader Bank: "ams referred to a range of sales pipeline opportunities in smartphone and
consumer applications (3D, optical and spectral sensing) that were clearly coming into view....
Accordingly, the current valuation corresponds with a significant discount to the peer group
average of about 14x, reflecting the single customer risk with Apple."
UBS: "ams AG pre announced Q4 results with revenues expected to reach €470.3m vs UBSe €460m
and cons €456.5m driven by 3D sensing and advanced light sensing (we believe Apple)."
ZKB: "Guidance for 2019 has been increased considerably from EUR 1.5 bn to EUR 2.2 bn.
Significantly visible growth opportunities in smartphone and consumer applications were put
forward as the reason"
Tech stocks remain the biggest sectoral gainers in Europe over the last 12 months but their
rally has stalled as investors switched into banks and autos as the new year started.
(Danilo Masoni)
*****
WHAT YOU NEED TO KNOW BEFORE EUROPE OPENS
Hedge fund Elliott Management buys stake in UK pay-TV group Sky
MEDIA-Novo Nordisk is planning to raise bid for Belgian Ablynx- Bloomberg
GKN received several approaches for business after Melrose bid- FT
Roche wins FDA's breakthrough therapy label for autism drug
Apple component supplier AMS doubles 2017 revenue, raises outlook
German industrial workers to stage 24-hour strikes
Banco BPM could be part of new wave of banking mergers - CEO
Spain's Bankia posts a Q4 loss of 235 mln euros after BMN integration
Provident Financial former execs sue lender over "unfair dismissal"
ACS/Hochtief consortium picked for L.A. airport rail project
Deutsche Bank to hike bonuses to more than 1 bln euros for 2017 - FAS
France's Engie acquires Brazil's ACS
Israeli investor secures 22.5 pct stake in Germany's TLG Immobilien
MORNING CALL: EUROPEAN STOCKS TO RISE AS HEAVY EARNINGS WEEK BEGINS (0718 GMT)
Good morning and welcome to Live Markets.
Futures indicate a strong start for European stocks as a heavy week for corporate earnings
begins. Investors are scrutinising this earnings season closely as a test of the foundations of
the stellar run-up in equities, and to see whether last year's impressive earnings recovery has
legs.
In Asian trading the bull run continued, buoyed by strong earnings. Meanwhile the dollar
managed to edge up from lows but remains under pressure.
(Helen Reid)
*****
(Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)